2023 1st Quarter U.S. Investment Market Review

Volatility continued to challenge investors in the first quarter as financial sector weakness, elevated inflation and an uncertain outlook for monetary policy sent markets through twists and turns after a strong start to the year. Despite this, many sectors have managed gains year-to-date, a welcome development after last year’s losses.

The asset class returns show positive performance across a broad mix of global stocks and bonds. Beneath the surface, however, some sectors are holding up better than others. Volatility during the first quarter specifically pressured U.S. equities while international markets are now outperforming.

Looking ahead, U.S. equities may face further challenges, particularly if earnings downgrades materialize alongside a recession. Continued headwinds posed by above average wage inflation, contracting margins and slowing growth emphasize a need for active management to identify the high-quality sectors and companies best positioned to weather a mild recession and deliver strong long-run returns. Moreover, steeply discounted valuations compared to the U.S. and a weakening dollar suggest that international equity outperformance should continue. Core fixed income continues to look very attractive as mounting growth concerns and the potential for rate cuts in the year ahead mean that bonds offer income, capital appreciation and diversification benefits once again.

Most importantly, as investors consider the risks on the horizon, it is important to appreciate the benefits diversification has offered. While stock-bond correlations turned positive last year, the end of the Fed’s tightening cycle and subsiding inflation should allow the traditional negative relationship to reassert itself. Moreover, it’s very challenging to cherry pick the best and worst performing asset classes each year, whereas a diversified portfolio has delivered investors a smoother ride with solid returns over the long-term.